A Russian American invests in Europe

In 2004 the owners of the Russian company Alfa-group entrusted about $2 billion to investment banker Alex Knaster. To date his funds’ assets have reached $6.5 billion and some American pension funds have joined its investor pool.

In Alex Knaster’s
London office in Park Lane there’s a letter he bought at a Christie’s auction
in 2007 for $157,326: a letter Ernest Hemmingway sent to his friend poet Ezra
Pound in 1925 upon arrival to Spanish Pamplona. After that Hemingway embarked
on The Sun Also Rises which
celebrated the ancient town.

For more than 800 years on July 6, at midday sharp,
the famous running of the bulls has been opening the San-Fermin fiesta where
people risk their lives running along the streets with a herd of furious bulls
raced to the corrida venue.

Knaster first
attended Pamplona’s San-Fermin festival right after graduating from Harvard
Business School in 1985 and has been back some 6-7 times since then.

He registered the
Pamplona trade mark 20 years ago and in 2004 gave this name to his asset
management company. One of the Alfa-group structures owned by Mikhail
Fridman, German Khan and Alexey Kuzmichev was among the first shareholders with
its funds aimed at investment in Europe and the US.

Since then, according to a
Fridman contact, the company entrusted to Knaster about $2 billion. Whenreporting on Pamplona’s
deals, foreign media refer to it as a company of “Russian oligarchs” from Alfa-group.

It is a big
investor but by far not the only one, says Knaster, and nothing else links
Pamplona to Russia. Pamplona manages $6.5 billion worth of assets. “American
pension funds, large international financial institutions and funds of funds
are among our investors,” he adds.

A Russian American

Alex Knaster was
born in Moscow in 1959. At the age of 16 he left Russia for the US with his
parents and got citizenship there. The family wasn’t particularly well-to-do,
but he managed to win a scholarship from Carnegie Mellon University.

After
graduating with a bachelor’s in electric engineering and mathematics he joined
Schlumberger in 1980 as an engineer to work at the oil platforms in the Gulf of
Mexico. This allowed him to earn enough money to pay for his degree at Harvard
Business School, after which he worked at a few investment banks.

In 1995 Knaster
returned to Russia as head of the Russian branch of Credit Suisse First Boston.
“I came to Russia for an interesting job which turned into 6 years,” Knaster
recalls. In 1998, just a couple of weeks before the August crisis, he resigned
from Credit Suisse First Boston to accept Fridman’s offer of a CEO position at
Alfa-bank.

Alexander Gafin,
Alfa-bank former vice president, recalls that “Fridman entrusted to Knaster all
the tough talks and deals that Alfa handled.”

On accepting the
offer to join Alfa-bank, the investment banker got the bank’s stock purchase
option which he took advantage of later.

“But I didn’t plan
to stay in Russia forever: my own immediate family as well as my wife’s live in
the US,” Knaster explains. Since Knaster had long cherished the idea of
starting up his own business, it was decided that he would set up an asset
management company where Alfa would invest some of its profit, says a Fridman
contact.

According to him, one of Alfa structures invests in Pamplona.
Therefore, the invested funds belong to Fridman, Khan and Kuzmichev pro rata to
their shares in the Alfa-Group core structure -- CTF Holdings. According to
Forbes, these are 46.85 percent, 29.88 percent and 23.27 percent respectively.

Thanks to Alfa, Pamplona raised €500 million in 2005 for its first private
equity fund and the fund of funds (which invests in other funds’ assets).

Investing in Europe

Pamplona has several business directions with private equity funds at the
core, which, Knaster says, account for over half of the managed assets
(according to the company, $6.5 billion).

“Usually private
equity funds commit themselves to certain limitations by investing only into
certain regions or industries. They take decisions on whether to buy into
public companies’ shares, buy bonds of companies on the brink of default to
convert them through bankruptcy into joint stock capital, or to jointly buy
shares.

This approach allows for more success in a certain area but it lacks in
flexibility,” Knaster explains. “That’s why we decided from the outset to build
no artificial constraints for our deals.”

There are no
geographical limits either: 70 people of different nationalities work for Pamplona
in its three offices in London, New York and Malta. “We consider about 300
deals annually, we follow up on 20 out of these and do spend some funds, while
usually one or two eventually are signed off on,” says Knaster.

Pamplona, according
to Knaster, buys assets which can be improved with financial instruments: “We
do not usually meddle with production issues.”

For example, Pamplona has
invested in Haanpaa, a Scandinavian company dealing with the transportation of
liquid chemicals; Pegas, a Czech manufacturer of fiber for hygienic produce;
SAF, a German producer of truck components and Amor, a German jewelry chain.

In crisis Pamplona
closed one of its most successful deals by buying TMD Friction, one of the
world’s biggest producers of automobile brake systems and Germany’s oldest, for
639 million. In 2008 due to the decline in orders from automobile producers the
company was penniless and could not service its debts.

It ended up declaring a
controlled bankruptcy by the end of the year. The parties did not disclose the
sum of the transaction; according to the unquote.com analytical resource, it
cost Pamplona about €100 million ($130 million).

Related:

“Knaster foresaw
that in crisis people won’t buy new cars but would rather stick with the old
ones replacing wearing off brake shoes with new ones, so the demand for these
will be on the rise around the world,” Gafin praises his former
colleague.

TMD expanded the
chain of components for sale on the secondary market and launched new brands in
this industry. The components market started growing and the new cars market
started recovering later on.

In 2010 the
company’s revenue reached €638 million ($829 million) – 20 percent more than in
2009, EBITDA totaled €71 million ($92 million) with 160 percent of growth. TMD
reported then that its sales increase in 2010 was due, in the first place, to
the components secondary market, which accounted for 70 percent of its sales.

Three funds

Today Pamplona has
grown to comprise three funds. Pamplona Capital Partners II, the second private
equity fund worth €1.3 billion ($1.7 billion) was formed in 2007 (Alfa’s share is
not known). The transaction volume of its own funds grew from €40 million ($52
million) to €200 million ($260 million).

Pamplona Capital Partners III, the
third private equity fund worth €2 billion ($2.6 billion) was formed in 2012
and has not yet raised a full investment pool (Alfa’s share is not known).

“I think both
Pamplona funds display very good results,” says Nicolas Jordan, co-head of
Goldman Sachs operations in Moscow. According to him, recently, a good return on
capital has been around 9-12 percent annually, 15-20 percent annually is a very
good result while 20-30 percent is rarely achievable.